Perspectives on capitalism
Encyclopedia
Throughout modern history
, a variety of influential perspectives on capitalism have shaped modern economic thought. Adam Smith
was one of the first influential writers on the topic, with his book The Wealth of Nations
, which is generally considered to be the start of classical economics
which emerged in the 18th century. To the contrary, Karl Marx
considered capitalism
to be a historically specific mode of production
and considered capitalism a phase of economic development that would pass and be replaced by pure communism. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy. For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle
. This argument is intertwined with Marx's version of the labor theory of value
asserting that labor is the source of all value, and thus of profit. Max Weber considered market
exchange
, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping 'rationalization'. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master
and journeyman
in a guild
, or between lord
and peasant
in a manor
.
Meanwhile Institutional economics
, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. In the late 19th century, the German Historical School of economics diverged, with the emerging Austrian School
of economics, led at the time by Carl Menger
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter
, a forerunner of the Austrian School of economics, emphasized the "creative destruction
" of capitalism—the fact that market economies undergo constant change. The Austrian economists Ludwig von Mises
and Friedrich Hayek
were among the leading defenders of market economy
against 20th century proponents of socialist planned economies. Among Mises's arguments were the economic calculation problem
. It was first proposed by Ludwig von Mises
in 1920 and later expounded by Friedrich Hayek
. The problem referred to is that of how to distribute resources rationally
in an economy. The free market
solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. Mises and Hayek argued that only market capitalism could manage a complex, modern economy.
Partially opposed to that view the British economist John Maynard Keynes
argued in his 1937 The General Theory of Employment, Interest, and Money that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium
despite high unemployment
. John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation
can be effective, and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle
, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression
. Supply-side economics
developed during the 1970s in response to Keynesian economic policy, and in particular the failure of demand management
to stabilize Western economies during the stagflation
of the 1970s, in the wake of the oil crisis in 1973
. It drew on a range of non-Keynesian economic thought, particularly Austrian school thinking on entrepreneurship
and new classical macroeconomics
. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as Ibn Khaldun
, Jonathan Swift
, David Hume
, Adam Smith
and Alexander Hamilton
. Typical policy recommendations of supply-side economics are lower marginal tax rate
s and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.
Today, the majority academic research on capitalism in the English-speaking world
draws on neoclassical economic thought
. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market
-based financing rather than state financing. Milton Friedman
took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization
(or privatization
) of state enterprises and the supply-side economics
of Ronald Reagan
and Margaret Thatcher
. The Chicago School of economics
is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves
and depressions result only from government intervention.
The classical school of economic thought
emerged in Britain in the late 18th century. The classical political economists Adam Smith
, David Ricardo
, Jean-Baptiste Say
, and John Stuart Mill
published analyses of the production, distribution and exchange of goods in a market
that have since formed the basis of study for most contemporary economists.
In France, 'Physiocrats' like François Quesnay
promoted free trade
based on a conception that wealth originated from land. Quesnay's Tableau Économique (1759), described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and customs duties and advocated free trade
. Richard Cantillon
defined long-run equilibrium as the balance of flows of income, and argued that the supply and demand
mechanism around land influenced short-term prices.
Smith's attack on mercantilism
and his reasoning for "the system of natural liberty" in The Wealth of Nations
(1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the "invisible hand
" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.
He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo
, second most important of the classical political economists and one of the most influential economists of modern times.
In The Principles of Political Economy and Taxation (1817), he developed the law of comparative advantage
, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade
. Ricardo was a supporter of Say's Law
and held the view that full employment is the normal equilibrium for a competitive economy. He also argued that inflation
is closely related to changes in quantity of money and credit
and was a proponent of the law of diminishing returns
, which states that each additional unit of input yields less and less additional output.
The values of classical political economy are strongly associated with the classical liberal
doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public good
s. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll
). In addition, he advocated retaliatory tariffs
to bring about free trade, and copyright
s and patent
s to encourage innovation.
considered capitalism to be a historically specific mode of production
(the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capitalism has become the dominant mode of production.
The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist
or communist
transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached.
Following Adam Smith
, Marx distinguished the use value
of commodities from their exchange value
in the market. Capital
, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power
had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist.
This difference in values, he argues, constitutes surplus value
, which the capitalists extract and accumulate. In his book Capital
, Marx argues that the capitalist mode of production
is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities. He argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, to survive, to sell their labor for a living wage.
In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy. For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle
. This argument is intertwined with Marx's version of the labor theory of value
asserting that labor is the source of all value, and thus of profit.
Vladimir Lenin
, in Imperialism, the Highest Stage of Capitalism
(1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism. Some 20th century Marxian economists
consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive.
Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value
, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.
David Harvey
extends Marxian thinking through which he theorizes the differential production of place, space and political activism under capitalism. He uses Marx’s theory of crisis to aid his argument that capitalism must have its “fixes” but that we cannot predetermine what fixes will be implemented, nor in what form they will be.
This idea of fix is suggestive and could mean fix as in stabilize, heal or solve, or as in a junky needing a fix – the idea of preventing feeling worse in order to feel better. In Limits to Capital (1982), Harvey outlines an overdetermined, spatially restless capitalism coupled with the spatiality of crisis formation and its resolution. Furthermore, his work has been central for understanding the contractions of capital accumulation and international movements of capitalist modes of production and money flows.
In his essay, Notes towards a theory of uneven geographical development, Harvey examines the causes of the extreme volatility in contemporary political economic fortunes across and between spaces of the world economy. He bases this uneven development on four conditionalities, being: The material embedding of capital accumulation processes in the web of socio-ecological life; accumulation by dispossession; the law-like character of capital accumulation in space and time; and, political, social and “class” struggles at a variety of geographical scales.
In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist Max Weber
. Weber considered market
exchange
, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping 'rationalization'. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master
and journeyman
in a guild
, or between lord
and peasant
in a manor
.
In his book The Protestant Ethic and the Spirit of Capitalism
(1904–1905), Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern western capitalism. For Weber, the 'spirit of capitalism' was, in general, that of ascetic Protestantism; this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically, and thus also the propensity to reinvest capital: this was sufficient, then, to create "self-mediating capital" as conceived by Marx.
This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic, Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…”
And, "If God show you a way in which you may lawfully get more than in another way (without wrong to your soul or to any other), if you refuse this, and choose the less gainful way, you cross one of the ends of your calling, and you refuse to be God's steward, and to accept His gifts and use them for him when He requierth it: you may labour to be rich for God, though not for the flesh and sin" (p. 108).
Western Capitalism, was, most generally for Weber, the "rational organization of formally free labor." The idea of the "formally free" laborer, meant, in the double sense of Marx, that the laborer was both free to own property, and free of the ability to reproduce his labor power, i.e., was the victim of expropriation of his means of production. It is only on these conditions, still abundantly obvious in the modern world of Weber, that western capitalism is able to exist.
For Weber, modern western capitalism represented the order "now bound to the technical and economic conditions of machine production which to-day determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt" (p. 123). This is further seen in his criticism of "specialists without spirit, hedonists
without a heart" that were developing, in his opinion, with the fading of the original Puritan
"spirit" associated with capitalism.
Institutional economics, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. It emphasizes the legal foundations of capitalism (see John R. Commons
) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey
, Thorstein Veblen
, and Daniel Bromley
.)
One key figure in institutional economics was Thorstein Veblen
who in his book The Theory of the Leisure Class
(1899) analyzed the motivations of wealthy people in capitalism who conspicuously consumed
their riches as a way of demonstrating success. The concept of conspicuous consumption
was in direct contradiction to the neoclassical view that capitalism was efficient.
In The Theory of Business Enterprise
(1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.
, capitalism is primarily identified in terms of the organization of production for market
s. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus. For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy
combined with an emphasis on the profit motive.
In the late 19th century, the German Historical School of economics diverged, with the emerging Austrian School
of economics, led at the time by Carl Menger
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter
, a forerunner of the Austrian School of economics, emphasized the "creative destruction
" of capitalism—the fact that market economies undergo constant change.
At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change.
The Austrian economists Ludwig von Mises
and Friedrich Hayek
were among the leading defenders of market economy
against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy.
Among their arguments were the economic calculation problem
. It was first proposed by Ludwig von Mises
in 1920 and later expounded by Friedrich Hayek
. The problem referred to is that of how to distribute resources rationally
in an economy. The free market
solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability
which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages
and surpluses
; Mises and Hayek argued that this is the only possible solution, and without the information provided by market prices socialism lacks a method to rationally allocate resources. Ludwig von Mises
argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production
, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently. This led him to declare "...that rational economic activity is impossible in a socialist commonwealth
." Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.
Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics
built on the work of the Austrian School, and particularly emphasize Say's Law
: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.
Austrian economists claim that Marx
failed to make the distinction between capitalism and mercantilism. They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist
doctrines of mercantilism with capitalism.
Austrian economics has been a major influence on some forms of libertarianism
, in which laissez-faire
capitalism is considered to be the ideal economic system. It influenced economists and political philosophers and theorists including Henry Hazlitt
, Hans-Hermann Hoppe
, Israel Kirzner
, Murray Rothbard
, Walter Block
and Richard M. Ebeling.
In his 1937 The General Theory of Employment, Interest, and Money, the British economist John Maynard Keynes
argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium
despite high unemployment
.
Essentially rejecting Say's law
, he argued that some people may have a liquidity preference
that would see them rather hold money than buy new goods or services, which therefore raised the prospect that the Great Depression
would not end without what he termed in the General Theory "a somewhat comprehensive socialization of investment."
Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand
, fighting high unemployment and deflation
of the sort seen during the 1930s. He and his followers recommended "pump-priming
" the economy to avoid recession
: cutting taxes, increasing government borrowing, and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation
to cut real wages and to deter people from holding money.
John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective, and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression. The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics
and the Austrian School.
Another challenge to Keynesian thinking came from his colleague Piero Sraffa
, and subsequently from the Neo-Ricardian school
that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit
causes a dynamic instability in social and economic relations.
and capital gains tax
rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices.
The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski
in 1975, but according to Robert D. Atkinson's Supply-Side Follies [p. 50], the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell
and Arthur Laffer
. Today, supply-side economics is often conflated with the politically rhetorical term "trickle-down economics
", but as Jude Wanniski points out in his book The Way The World Works, trickle-down economics is conservative Keynesianism associated with the Republican Party.
Typical policy recommendations of supply-side economics are lower marginal tax rate
s and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.
Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase.
An argument along similar lines has also been advocated by Ali ibn Abi Talib, the first Shi'a Imam and fourth Caliph of the Islamic empire; in his letter to the Governor of Egypt, Malik al-Ashtar. He writes:
draws on neoclassical economic thought
. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market
-based financing rather than state financing.
Milton Friedman
took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization
(or privatization
) of state enterprises and the supply-side economics
of Ronald Reagan
and Margaret Thatcher
.
The Chicago School of economics
is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves
and depressions result only from government intervention.
Friedman, for example, argued that the Great Depression
was result of a contraction of the money supply, controlled by the Federal Reserve
, and not by the lack of investment as John Maynard Keynes
had argued. Ben Bernanke
, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.
Neoclassical economists, today the majority of economists, consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism
is the theory that economic value results from marginal utility and marginal cost
(the marginal concepts
). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.
taught in prominent universities. It is most closely associated with neoclassical economics
,
or more precisely by the neoclassical synthesis
, which combines neoclassical approach to microeconomics with Keynesian approach
to macroeconomics.
Mainstream economists are not generally separated into schools, but two major contemporary orthodox economic schools of thought
are the "saltwater and freshwater schools." The saltwater schools consist of the universities and other institutions located near the east and west coast of the United States
, such as Berkeley
, Harvard, MIT, University of Pennsylvania
, Princeton
, Columbia
, Duke
, Stanford, and Yale
. Freshwater schools include the University of Chicago
, Carnegie Mellon University
, the University of Rochester
and the University of Minnesota
. They were referred to as the 'freshwater school' since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes
. The Saltwater school is associated with Keynesian ideas of government intervention into the free market
, while the Freshwater schools are skeptical of the benefits of the government. Mainstream economists do not, in general, identify themselves as members of a particular school; they may, however, be associated with approaches within a field such as the rational-expectations
approach to macroeconomics
.
Modern history
Modern history, or the modern era, describes the historical timeline after the Middle Ages. Modern history can be further broken down into the early modern period and the late modern period after the French Revolution and the Industrial Revolution...
, a variety of influential perspectives on capitalism have shaped modern economic thought. Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
was one of the first influential writers on the topic, with his book The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...
, which is generally considered to be the start of classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
which emerged in the 18th century. To the contrary, Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
considered capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
to be a historically specific mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
and considered capitalism a phase of economic development that would pass and be replaced by pure communism. In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy. For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle
Class struggle
Class struggle is the active expression of a class conflict looked at from any kind of socialist perspective. Karl Marx and Friedrich Engels wrote "The [written] history of all hitherto existing society is the history of class struggle"....
. This argument is intertwined with Marx's version of the labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
asserting that labor is the source of all value, and thus of profit. Max Weber considered market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
exchange
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping 'rationalization'. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master
Master craftsman
A master craftsman or master tradesman was a member of a guild. In the European guild system, only masters were allowed to be members of the guild....
and journeyman
Journeyman
A journeyman is someone who completed an apprenticeship and was fully educated in a trade or craft, but not yet a master. To become a master, a journeyman had to submit a master work piece to a guild for evaluation and be admitted to the guild as a master....
in a guild
Guild
A guild is an association of craftsmen in a particular trade. The earliest types of guild were formed as confraternities of workers. They were organized in a manner something between a trade union, a cartel, and a secret society...
, or between lord
Lord
Lord is a title with various meanings. It can denote a prince or a feudal superior . The title today is mostly used in connection with the peerage of the United Kingdom or its predecessor countries, although some users of the title do not themselves hold peerages, and use it 'by courtesy'...
and peasant
Peasant
A peasant is an agricultural worker who generally tend to be poor and homeless-Etymology:The word is derived from 15th century French païsant meaning one from the pays, or countryside, ultimately from the Latin pagus, or outlying administrative district.- Position in society :Peasants typically...
in a manor
Manorialism
Manorialism, an essential element of feudal society, was the organizing principle of rural economy that originated in the villa system of the Late Roman Empire, was widely practiced in medieval western and parts of central Europe, and was slowly replaced by the advent of a money-based market...
.
Meanwhile Institutional economics
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. In the late 19th century, the German Historical School of economics diverged, with the emerging Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
of economics, led at the time by Carl Menger
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
, a forerunner of the Austrian School of economics, emphasized the "creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...
" of capitalism—the fact that market economies undergo constant change. The Austrian economists Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
and Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
were among the leading defenders of market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
against 20th century proponents of socialist planned economies. Among Mises's arguments were the economic calculation problem
Economic calculation problem
The economic calculation problem is a criticism of central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy...
. It was first proposed by Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
in 1920 and later expounded by Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
. The problem referred to is that of how to distribute resources rationally
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...
in an economy. The free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. Mises and Hayek argued that only market capitalism could manage a complex, modern economy.
Partially opposed to that view the British economist John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
argued in his 1937 The General Theory of Employment, Interest, and Money that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
despite high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
. John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation
Regulation
Regulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
can be effective, and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
. Supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
developed during the 1970s in response to Keynesian economic policy, and in particular the failure of demand management
Demand management
Demand management is a planning methodology used to manage forecasted demand.-Demand management in economics:In economics, demand management is the art or science of controlling economic demand to avoid a recession...
to stabilize Western economies during the stagflation
Stagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
of the 1970s, in the wake of the oil crisis in 1973
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
. It drew on a range of non-Keynesian economic thought, particularly Austrian school thinking on entrepreneurship
Entrepreneurship
Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response...
and new classical macroeconomics
New classical macroeconomics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics...
. The intellectual roots of supply-side economics have also been traced back to various early economic thinkers such as Ibn Khaldun
Ibn Khaldun
Ibn Khaldūn or Ibn Khaldoun was an Arab Tunisian historiographer and historian who is often viewed as one of the forerunners of modern historiography, sociology and economics...
, Jonathan Swift
Jonathan Swift
Jonathan Swift was an Irish satirist, essayist, political pamphleteer , poet and cleric who became Dean of St...
, David Hume
David Hume
David Hume was a Scottish philosopher, historian, economist, and essayist, known especially for his philosophical empiricism and skepticism. He was one of the most important figures in the history of Western philosophy and the Scottish Enlightenment...
, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
and Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...
. Typical policy recommendations of supply-side economics are lower marginal tax rate
Marginal tax rate
In a tax system and in economics, the tax rate describes the burden ratio at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal...
s and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.
Today, the majority academic research on capitalism in the English-speaking world
English-speaking world
The English-speaking world consists of those countries or regions that use the English language to one degree or another. For more information, please see:Lists:* List of countries by English-speaking population...
draws on neoclassical economic thought
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
-based financing rather than state financing. Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization
Marketization
Marketization is the process that enables the state-owned enterprises to act like market-oriented firms. This is achieved through reduction of state subsidies, deregulation, organizational restructuring , decentralization and in some cases privatization...
(or privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
) of state enterprises and the supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
of Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
and Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
. The Chicago School of economics
Chicago school (economics)
The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of The University of Chicago, some of whom have constructed and popularized its principles...
is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
and depressions result only from government intervention.
Classical political economy
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
emerged in Britain in the late 18th century. The classical political economists Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, Jean-Baptiste Say
Jean-Baptiste Say
Jean-Baptiste Say was a French economist and businessman. He had classically liberal views and argued in favor of competition, free trade, and lifting restraints on business...
, and John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...
published analyses of the production, distribution and exchange of goods in a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
that have since formed the basis of study for most contemporary economists.
In France, 'Physiocrats' like François Quesnay
François Quesnay
François Quesnay was a French economist of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats...
promoted free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
based on a conception that wealth originated from land. Quesnay's Tableau Économique (1759), described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and customs duties and advocated free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
. Richard Cantillon
Richard Cantillon
Richard Cantillon was an Irish-French economist and author of Essai sur la Nature du Commerce en Général , a book considered by William Stanley Jevons to be the "cradle of political economy". Although little information exists on Cantillon's life, it is known that he became a successful banker and...
defined long-run equilibrium as the balance of flows of income, and argued that the supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
mechanism around land influenced short-term prices.
Smith's attack on mercantilism
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
and his reasoning for "the system of natural liberty" in The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...
(1776) are usually taken as the beginning of classical political economy. Smith devised a set of concepts that remain strongly associated with capitalism today, particularly his theory of the "invisible hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
" of the market, through which the pursuit of individual self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.
He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
, second most important of the classical political economists and one of the most influential economists of modern times.
In The Principles of Political Economy and Taxation (1817), he developed the law of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...
. Ricardo was a supporter of Say's Law
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
and held the view that full employment is the normal equilibrium for a competitive economy. He also argued that inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
is closely related to changes in quantity of money and credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
and was a proponent of the law of diminishing returns
Diminishing returns
In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.The law of diminishing returns In economics, diminishing returns (also...
, which states that each additional unit of input yields less and less additional output.
The values of classical political economy are strongly associated with the classical liberal
Classical liberalism
Classical liberalism is the philosophy committed to the ideal of limited government, constitutionalism, rule of law, due process, and liberty of individuals including freedom of religion, speech, press, assembly, and free markets....
doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods. Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public good
Public good
In economics, a public good is a good that is non-rival and non-excludable. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others; and non-excludability means that no one can be effectively excluded from using the good...
s. For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll
Toll road
A toll road is a privately or publicly built road for which a driver pays a toll for use. Structures for which tolls are charged include toll bridges and toll tunnels. Non-toll roads are financed using other sources of revenue, most typically fuel tax or general tax funds...
). In addition, he advocated retaliatory tariffs
Free trade area
A free trade area is a trade bloc whose member countries have signed a free trade agreement , which eliminates tariffs, import quotas, and preferences on most goods and services traded between them. If people are also free to move between the countries, in addition to FTA, it would also be...
to bring about free trade, and copyright
Copyright
Copyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
s and patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s to encourage innovation.
Marxist political economy
Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
considered capitalism to be a historically specific mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
(the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capitalism has become the dominant mode of production.
The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
or communist
Communism
Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...
transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached.
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, Marx distinguished the use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
of commodities from their exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
in the market. Capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist.
This difference in values, he argues, constitutes surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
, which the capitalists extract and accumulate. In his book Capital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, Marx argues that the capitalist mode of production
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities. He argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, to survive, to sell their labor for a living wage.
In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy. For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle
Class struggle
Class struggle is the active expression of a class conflict looked at from any kind of socialist perspective. Karl Marx and Friedrich Engels wrote "The [written] history of all hitherto existing society is the history of class struggle"....
. This argument is intertwined with Marx's version of the labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
asserting that labor is the source of all value, and thus of profit.
Vladimir Lenin
Vladimir Lenin
Vladimir Ilyich Lenin was a Russian Marxist revolutionary and communist politician who led the October Revolution of 1917. As leader of the Bolsheviks, he headed the Soviet state during its initial years , as it fought to establish control of Russia in the Russian Civil War and worked to create a...
, in Imperialism, the Highest Stage of Capitalism
Imperialism, the Highest Stage of Capitalism
Imperialism, the Highest Stage of Capitalism , by Lenin, describes the function of financial capital in generating profits from imperial colonialism, as the final stage of capitalist development to ensure greater profits...
(1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism. Some 20th century Marxian economists
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive.
Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.
David Harvey
David Harvey (geographer)
David Harvey is the Distinguished Professor of Anthropology at the Graduate Center of the City University of New York . A leading social theorist of international standing, he received his PhD in Geography from University of Cambridge in 1961. Widely influential, he is among the top 20 most cited...
extends Marxian thinking through which he theorizes the differential production of place, space and political activism under capitalism. He uses Marx’s theory of crisis to aid his argument that capitalism must have its “fixes” but that we cannot predetermine what fixes will be implemented, nor in what form they will be.
This idea of fix is suggestive and could mean fix as in stabilize, heal or solve, or as in a junky needing a fix – the idea of preventing feeling worse in order to feel better. In Limits to Capital (1982), Harvey outlines an overdetermined, spatially restless capitalism coupled with the spatiality of crisis formation and its resolution. Furthermore, his work has been central for understanding the contractions of capital accumulation and international movements of capitalist modes of production and money flows.
In his essay, Notes towards a theory of uneven geographical development, Harvey examines the causes of the extreme volatility in contemporary political economic fortunes across and between spaces of the world economy. He bases this uneven development on four conditionalities, being: The material embedding of capital accumulation processes in the web of socio-ecological life; accumulation by dispossession; the law-like character of capital accumulation in space and time; and, political, social and “class” struggles at a variety of geographical scales.
Weberian political sociology
Max Weber
Karl Emil Maximilian "Max" Weber was a German sociologist and political economist who profoundly influenced social theory, social research, and the discipline of sociology itself...
. Weber considered market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
exchange
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping 'rationalization'. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master
Master craftsman
A master craftsman or master tradesman was a member of a guild. In the European guild system, only masters were allowed to be members of the guild....
and journeyman
Journeyman
A journeyman is someone who completed an apprenticeship and was fully educated in a trade or craft, but not yet a master. To become a master, a journeyman had to submit a master work piece to a guild for evaluation and be admitted to the guild as a master....
in a guild
Guild
A guild is an association of craftsmen in a particular trade. The earliest types of guild were formed as confraternities of workers. They were organized in a manner something between a trade union, a cartel, and a secret society...
, or between lord
Lord
Lord is a title with various meanings. It can denote a prince or a feudal superior . The title today is mostly used in connection with the peerage of the United Kingdom or its predecessor countries, although some users of the title do not themselves hold peerages, and use it 'by courtesy'...
and peasant
Peasant
A peasant is an agricultural worker who generally tend to be poor and homeless-Etymology:The word is derived from 15th century French païsant meaning one from the pays, or countryside, ultimately from the Latin pagus, or outlying administrative district.- Position in society :Peasants typically...
in a manor
Manorialism
Manorialism, an essential element of feudal society, was the organizing principle of rural economy that originated in the villa system of the Late Roman Empire, was widely practiced in medieval western and parts of central Europe, and was slowly replaced by the advent of a money-based market...
.
In his book The Protestant Ethic and the Spirit of Capitalism
The Protestant Ethic and the Spirit of Capitalism
The Protestant Ethic and the Spirit of Capitalism is a book written by Max Weber, a German sociologist, economist, and politician. Begun as a series of essays, the original German text was composed in 1904 and 1905, and was translated into English for the first time by Talcott Parsons in 1930...
(1904–1905), Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern western capitalism. For Weber, the 'spirit of capitalism' was, in general, that of ascetic Protestantism; this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically, and thus also the propensity to reinvest capital: this was sufficient, then, to create "self-mediating capital" as conceived by Marx.
This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic, Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…”
And, "If God show you a way in which you may lawfully get more than in another way (without wrong to your soul or to any other), if you refuse this, and choose the less gainful way, you cross one of the ends of your calling, and you refuse to be God's steward, and to accept His gifts and use them for him when He requierth it: you may labour to be rich for God, though not for the flesh and sin" (p. 108).
Western Capitalism, was, most generally for Weber, the "rational organization of formally free labor." The idea of the "formally free" laborer, meant, in the double sense of Marx, that the laborer was both free to own property, and free of the ability to reproduce his labor power, i.e., was the victim of expropriation of his means of production. It is only on these conditions, still abundantly obvious in the modern world of Weber, that western capitalism is able to exist.
For Weber, modern western capitalism represented the order "now bound to the technical and economic conditions of machine production which to-day determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt" (p. 123). This is further seen in his criticism of "specialists without spirit, hedonists
Hedonism
Hedonism is a school of thought which argues that pleasure is the only intrinsic good. In very simple terms, a hedonist strives to maximize net pleasure .-Etymology:The name derives from the Greek word for "delight" ....
without a heart" that were developing, in his opinion, with the fading of the original Puritan
Puritan
The Puritans were a significant grouping of English Protestants in the 16th and 17th centuries. Puritanism in this sense was founded by some Marian exiles from the clergy shortly after the accession of Elizabeth I of England in 1558, as an activist movement within the Church of England...
"spirit" associated with capitalism.
Institutional economics
John R. Commons
John Rogers Commons was an American institutional economist and labor historian at the University of Wisconsin–Madison.-Biography:Born in Hollansburg, Ohio, John R. Commons had a religious upbringing which led him to be an advocate for social justice early in life...
) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey
John Dewey
John Dewey was an American philosopher, psychologist and educational reformer whose ideas have been influential in education and social reform. Dewey was an important early developer of the philosophy of pragmatism and one of the founders of functional psychology...
, Thorstein Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...
, and Daniel Bromley
Daniel Bromley
Daniel w. Bromley is an economist, the Anderson-Bascom Professor of applied economics at the University of Wisconsin–Madison. His research fields include the institutional foundations of the economy property rights; the economics of natural resources and the environment; and economic development...
.)
One key figure in institutional economics was Thorstein Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...
who in his book The Theory of the Leisure Class
The Theory of the Leisure Class
The Theory of the Leisure Class: An Economic Study of Institutions is a book, first published in 1899, by the Norwegian-American economist and sociologist Thorstein Veblen while he was a professor at the University of Chicago....
(1899) analyzed the motivations of wealthy people in capitalism who conspicuously consumed
Conspicuous consumption
Conspicuous consumption is spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status....
their riches as a way of demonstrating success. The concept of conspicuous consumption
Conspicuous consumption
Conspicuous consumption is spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status....
was in direct contradiction to the neoclassical view that capitalism was efficient.
In The Theory of Business Enterprise
The Theory of Business Enterprise
The Theory of Business Enterprise is an economics book by Thorstein Veblen published in 1904 that looks at the growing corporate domination of culture and the economy....
(1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.
German Historical School and Austrian School
From the perspective of the German Historical SchoolHistorical school of economics
The Historical school of economics was an approach to academic economics and to public administration that emerged in 19th century in Germany, and held sway there until well into the 20th century....
, capitalism is primarily identified in terms of the organization of production for market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus. For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary economy
Monetary system
A monetary system is anything that is accepted as a standard of value and measure of wealth in a particular region.However, the current trend is to use international trade and investment to alter the policy and legislation of individual governments. The best recent example of this policy is the...
combined with an emphasis on the profit motive.
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
of economics, led at the time by Carl Menger
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
. Later generations of followers of the Austrian School continued to be influential in Western economic thought through much of the 20th century. The Austrian economist Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
, a forerunner of the Austrian School of economics, emphasized the "creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...
" of capitalism—the fact that market economies undergo constant change.
At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and many contemporary economists influenced by his work, argue that resources should flow from the declining to the expanding industries for an economy to grow, but they recognized that sometimes resources are slow to withdraw from the declining industries because of various forms of institutional resistance to change.
The Austrian economists Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
and Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
were among the leading defenders of market economy
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
against 20th century proponents of socialist planned economies. Mises and Hayek argued that only market capitalism could manage a complex, modern economy.
Among their arguments were the economic calculation problem
Economic calculation problem
The economic calculation problem is a criticism of central economic planning. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. The problem referred to is that of how to distribute resources rationally in an economy...
. It was first proposed by Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
in 1920 and later expounded by Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
. The problem referred to is that of how to distribute resources rationally
Rational choice theory
Rational choice theory, also known as choice theory or rational action theory, is a framework for understanding and often formally modeling social and economic behavior. It is the main theoretical paradigm in the currently-dominant school of microeconomics...
in an economy. The free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
solution is the price mechanism, wherein people individually have the ability to decide how a good or service should be distributed based on their willingness to give money for it. The price conveys embedded information about the abundance of resources as well as their desirability
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
which in turn allows, on the basis of individual consensual decisions, corrections that prevent shortages
Economic shortage
Economic shortage is a term describing a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus....
and surpluses
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
; Mises and Hayek argued that this is the only possible solution, and without the information provided by market prices socialism lacks a method to rationally allocate resources. Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently. This led him to declare "...that rational economic activity is impossible in a socialist commonwealth
Commonwealth
Commonwealth is a traditional English term for a political community founded for the common good. Historically, it has sometimes been synonymous with "republic."More recently it has been used for fraternal associations of some sovereign nations...
." Mises developed his critique of socialism more completely in his 1922 book Socialism, an Economic and Sociological Analysis.
Since a modern economy produces such a large array of distinct goods and services, and consists of such a large array of consumers and enterprises, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information. Thinkers within Supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
built on the work of the Austrian School, and particularly emphasize Say's Law
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.
Austrian economists claim that Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
failed to make the distinction between capitalism and mercantilism. They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist
Economic interventionism
Economic interventionism is an action taken by a government in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to affect its own economy...
doctrines of mercantilism with capitalism.
Austrian economics has been a major influence on some forms of libertarianism
Libertarianism
Libertarianism, in the strictest sense, is the political philosophy that holds individual liberty as the basic moral principle of society. In the broadest sense, it is any political philosophy which approximates this view...
, in which laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
capitalism is considered to be the ideal economic system. It influenced economists and political philosophers and theorists including Henry Hazlitt
Henry Hazlitt
Henry Stuart Hazlitt was an American economist, philosopher, literary critic and journalist for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times...
, Hans-Hermann Hoppe
Hans-Hermann Hoppe
Hans-Hermann Hoppe is an Austrian School economist of the anarcho-capitalist tradition, and a Professor Emeritus of economics at the University of Nevada, Las Vegas.-Academic career:...
, Israel Kirzner
Israel Kirzner
Israel Meir Kirzner is a leading economist in the Austrian School.-Early life:The son of a well-known rabbi and Talmudist, Kirzner was born in London, England and came to the United States via South Africa.-Education:After studying with the University of Cape Town, South Africa in 1947-48 and...
, Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
, Walter Block
Walter Block
Walter Edward Block is a free market economist and anarcho-capitalist associated with the Austrian School of economics.-Personal history and education:...
and Richard M. Ebeling.
Keynesian economics
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium
Economic equilibrium
In economics, economic equilibrium is a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal...
despite high unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
.
Essentially rejecting Say's law
Say's law
Say's law, or the law of market, is an economic principle of classical economics named after the French businessman and economist Jean-Baptiste Say , who stated that "products are paid for with products" and "a glut can take place only when there are too many means of production applied to one kind...
, he argued that some people may have a liquidity preference
Liquidity preference
In macroeconomic theory, Liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand...
that would see them rather hold money than buy new goods or services, which therefore raised the prospect that the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
would not end without what he termed in the General Theory "a somewhat comprehensive socialization of investment."
Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand
Aggregate demand
In macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
, fighting high unemployment and deflation
Deflation (economics)
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% . This should not be confused with disinflation, a slow-down in the inflation rate...
of the sort seen during the 1930s. He and his followers recommended "pump-priming
Deficit spending
Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus....
" the economy to avoid recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
: cutting taxes, increasing government borrowing, and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
to cut real wages and to deter people from holding money.
John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective, and that economic stabilizers can rein in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression. The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
and the Austrian School.
Another challenge to Keynesian thinking came from his colleague Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...
, and subsequently from the Neo-Ricardian school
Neo-Ricardianism
The neo-Ricardian school is an economic schoolthat derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's critique of Neoclassical economics as presented in his The Production of Commodities by Means of Commodities, and further developed by the...
that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
causes a dynamic instability in social and economic relations.
Supply Side Economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as adjusting income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and capital gains tax
Capital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
rates, and by allowing greater flexibility by reducing regulation. Consumers will then benefit from a greater supply of goods and services at lower prices.
The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski
Jude Wanniski
Jude Thaddeus Wanniski was an American journalist, conservative commentator, and political economist.- Early life and education :...
in 1975, but according to Robert D. Atkinson's Supply-Side Follies [p. 50], the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell
Robert Mundell
Robert Mundell, CC is a Nobel Prize-winning Canadian economist. Currently, Mundell is a professor of economics at Columbia University and the Chinese University of Hong Kong....
and Arthur Laffer
Arthur Laffer
Arthur Betz Laffer is an American economist who first gained prominence during the Reagan administration as a member of Reagan's Economic Policy Advisory Board . Laffer is best known for the Laffer curve, an illustration of the theory that there exists some tax rate between 0% and 100% that will...
. Today, supply-side economics is often conflated with the politically rhetorical term "trickle-down economics
Trickle-down economics
"Trickle-down economics" and "the trickle-down theory" are terms used in United States politics to refer to the idea that tax breaks or other economic benefits provided by government to businesses and the wealthy will benefit poorer members of society by improving the economy as a whole...
", but as Jude Wanniski points out in his book The Way The World Works, trickle-down economics is conservative Keynesianism associated with the Republican Party.
Typical policy recommendations of supply-side economics are lower marginal tax rate
Marginal tax rate
In a tax system and in economics, the tax rate describes the burden ratio at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal...
s and less regulation. Maximum benefits from taxation policy are achieved by optimizing the marginal tax rates to spur growth, although it is a common misunderstanding that supply side economics is concerned only with taxation policy when it is about removing barriers to production more generally.
Many early proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to compensate completely for the short-term costs of a tax cut, and that tax cuts could, in fact, cause overall revenue to increase.
An argument along similar lines has also been advocated by Ali ibn Abi Talib, the first Shi'a Imam and fourth Caliph of the Islamic empire; in his letter to the Governor of Egypt, Malik al-Ashtar. He writes:
Neoclassical economics and the Chicago School
Today, the majority academic research on capitalism in the English-speaking worldEnglish-speaking world
The English-speaking world consists of those countries or regions that use the English language to one degree or another. For more information, please see:Lists:* List of countries by English-speaking population...
draws on neoclassical economic thought
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
-based financing rather than state financing.
Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization
Marketization
Marketization is the process that enables the state-owned enterprises to act like market-oriented firms. This is achieved through reduction of state subsidies, deregulation, organizational restructuring , decentralization and in some cases privatization...
(or privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
) of state enterprises and the supply-side economics
Supply-side economics
Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing...
of Ronald Reagan
Ronald Reagan
Ronald Wilson Reagan was the 40th President of the United States , the 33rd Governor of California and, prior to that, a radio, film and television actor....
and Margaret Thatcher
Margaret Thatcher
Margaret Hilda Thatcher, Baroness Thatcher, was Prime Minister of the United Kingdom from 1979 to 1990...
.
The Chicago School of economics
Chicago school (economics)
The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of The University of Chicago, some of whom have constructed and popularized its principles...
is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
and depressions result only from government intervention.
Friedman, for example, argued that the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
was result of a contraction of the money supply, controlled by the Federal Reserve
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
, and not by the lack of investment as John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
had argued. Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....
, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.
Neoclassical economists, today the majority of economists, consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism
Marginalism
Marginalism refers to the use of marginal concepts in economic theory. Marginalism is associated with arguments concerning changes in the quantity used of a good or service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity...
is the theory that economic value results from marginal utility and marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
(the marginal concepts
Marginal concepts
In economics, marginal concepts are associated with a specific change in the quantity used of a good or service, as opposed to some notion of the over-all significance of that class of good or service, or of some total quantity thereof.- Marginality :...
). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.
Mainstream Economics
Mainstream economics is a loose term used to refer to the non-heterodox economicsHeterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
taught in prominent universities. It is most closely associated with neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
,
or more precisely by the neoclassical synthesis
Neoclassical synthesis
Neoclassical synthesis is a postwar academic movement in economics that attempts to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics...
, which combines neoclassical approach to microeconomics with Keynesian approach
Keynesian economics
Keynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
to macroeconomics.
Mainstream economists are not generally separated into schools, but two major contemporary orthodox economic schools of thought
Schools of economics
Schools of economic thought describes the variety of approaches in the history of economic theory noteworthy enough to be described as a 'school of thought'. While economists do not always fit into particular schools, particularly in modern times, classifying economists into schools of thought is...
are the "saltwater and freshwater schools." The saltwater schools consist of the universities and other institutions located near the east and west coast of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, such as Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...
, Harvard, MIT, University of Pennsylvania
University of Pennsylvania
The University of Pennsylvania is a private, Ivy League university located in Philadelphia, Pennsylvania, United States. Penn is the fourth-oldest institution of higher education in the United States,Penn is the fourth-oldest using the founding dates claimed by each institution...
, Princeton
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
, Columbia
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
, Duke
Duke
A duke or duchess is a member of the nobility, historically of highest rank below the monarch, and historically controlling a duchy...
, Stanford, and Yale
YALE
RapidMiner, formerly YALE , is an environment for machine learning, data mining, text mining, predictive analytics, and business analytics. It is used for research, education, training, rapid prototyping, application development, and industrial applications...
. Freshwater schools include the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, Carnegie Mellon University
Carnegie Mellon University
Carnegie Mellon University is a private research university in Pittsburgh, Pennsylvania, United States....
, the University of Rochester
University of Rochester
The University of Rochester is a private, nonsectarian, research university in Rochester, New York, United States. The university grants undergraduate and graduate degrees, including doctoral and professional degrees. The university has six schools and various interdisciplinary programs.The...
and the University of Minnesota
University of Minnesota
The University of Minnesota, Twin Cities is a public research university located in Minneapolis and St. Paul, Minnesota, United States. It is the oldest and largest part of the University of Minnesota system and has the fourth-largest main campus student body in the United States, with 52,557...
. They were referred to as the 'freshwater school' since Pittsburgh, Chicago, Rochester, and Minneapolis are located nearer to the Great Lakes
Great Lakes
The Great Lakes are a collection of freshwater lakes located in northeastern North America, on the Canada – United States border. Consisting of Lakes Superior, Michigan, Huron, Erie, and Ontario, they form the largest group of freshwater lakes on Earth by total surface, coming in second by volume...
. The Saltwater school is associated with Keynesian ideas of government intervention into the free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
, while the Freshwater schools are skeptical of the benefits of the government. Mainstream economists do not, in general, identify themselves as members of a particular school; they may, however, be associated with approaches within a field such as the rational-expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
approach to macroeconomics
Macroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
.
Concepts
- Consumption (economics)Consumption (economics)Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
- Economic liberalismEconomic liberalismEconomic liberalism is the ideological belief in giving all people economic freedom, and as such granting people with more basis to control their own lives and make their own mistakes. It is an economic philosophy that supports and promotes individual liberty and choice in economic matters and...
- Financial marketFinancial marketIn economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
- Free price systemFree price systemA free price system or free price mechanism is an economic system where prices are set by the interchange of supply and demand, with the resulting prices being understood as signals that are communicated between producers and consumers which serve to guide the production and distribution of...
- Gains from tradeGains from tradeGains from trade in economics refers to net benefits to agents from allowing an increase in voluntary trading with each other. In technical terms, it is the increase of consumer surplus plus producer surplus from lower tariffs or otherwise liberalizing trade...
- History of capitalismHistory of capitalismThe history of capitalism can be traced back to early forms of merchant capitalism practiced in Western Europe during the Middle Ages, though many economic historians consider the Netherlands as the first thoroughly capitalist country. In Early modern Europe it featured the wealthiest trading city ...
- History of economic thoughtHistory of economic thoughtThe history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
- Industrial RevolutionIndustrial RevolutionThe Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
- Mass productionMass productionMass production is the production of large amounts of standardized products, including and especially on assembly lines...
- Objectivism (Ayn Rand)Objectivism (Ayn Rand)Objectivism is a philosophy created by the Russian-American philosopher and novelist Ayn Rand . Objectivism holds that reality exists independent of consciousness, that human beings have direct contact with reality through sense perception, that one can attain objective knowledge from perception...
- Positive non-interventionismPositive non-interventionismPositive non-interventionism was the economic policy of Hong Kong; this policy can be traced back to the time when Hong Kong was under British rule...
- Spontaneous orderSpontaneous orderSpontaneous order, also known as "self-organization", is the spontaneous emergence of order out of seeming chaos. It is a process found in physical, biological, and social networks, as well as economics, though the term "self-organization" is more often used for physical and biological processes,...
People
- Amartya SenAmartya SenAmartya Sen, CH is an Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory, and for his interest in the problems of society's poorest members...
- Andrew CarnegieAndrew CarnegieAndrew Carnegie was a Scottish-American industrialist, businessman, and entrepreneur who led the enormous expansion of the American steel industry in the late 19th century...
- Ayn RandAyn RandAyn Rand was a Russian-American novelist, philosopher, playwright, and screenwriter. She is known for her two best-selling novels The Fountainhead and Atlas Shrugged and for developing a philosophical system she called Objectivism....
- Eugen von Böhm-BawerkEugen von Böhm-BawerkEugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of the Austrian School of economics.-Biography:...
- Frederic BastiatFrédéric BastiatClaude Frédéric Bastiat was a French classical liberal theorist, political economist, and member of the French assembly. He was notable for developing the important economic concept of opportunity cost.-Biography:...
- Freidrich Engels
- John D. RockefellerJohn D. RockefellerJohn Davison Rockefeller was an American oil industrialist, investor, and philanthropist. He was the founder of the Standard Oil Company, which dominated the oil industry and was the first great U.S. business trust. Rockefeller revolutionized the petroleum industry and defined the structure of...
- John LockeJohn LockeJohn Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
- Joseph Stiglitz
- J. P. MorganJ. P. MorganJohn Pierpont Morgan was an American financier, banker and art collector who dominated corporate finance and industrial consolidation during his time. In 1892 Morgan arranged the merger of Edison General Electric and Thomson-Houston Electric Company to form General Electric...
Works
- Capitalism and FreedomCapitalism and FreedomCapitalism and Freedom is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It sold over 400,000 copies in the first 18 years and more than half a million since 1962. It has been translated...
- Capitalism: The Unknown IdealCapitalism: the Unknown IdealCapitalism: The Unknown Ideal is a collection of essays, mostly by Ayn Rand, with additional essays by her associates Nathaniel Branden, Alan Greenspan and Robert Hessen. The book focuses on the moral nature of laissez-faire capitalism and private property...
- Economics in One LessonEconomics in One LessonEconomics in One Lesson is an introduction to free market economics written by Henry Hazlitt and published in 1946, based on Frédéric Bastiat's essay .The "One Lesson" is stated in Part One of the book:...
- Free to ChooseFree to ChooseFree to Choose is a book and a ten-part television series broadcast on public television by economists Milton and Rose D...
- GrundrisseGrundrisseThe Grundrisse der Kritik der Politischen Ökonomie is a lengthy manuscript by the German philosopher Karl Marx, completed in 1858. However, as it existed primarily as a collection of unedited notes, the work remained unpublished until 1939...
- Individualism and Economic OrderIndividualism and Economic OrderIndividualism and Economic Order is a book written by Friedrich Hayek . It is a collection of essays originally published between the 1930s and 40s, discussing topics ranging from moral philosophy to the methods of the social sciences and economic theory to contrast free markets with planned...
- Man, Economy, and StateMan, Economy, and StateMan, Economy, and State: A Treatise on Economic Principles, first published in 1962, is a book on economics by Murray Rothbard, and is one of the most important books in the Austrian School of economics...
- The Anti-Capitalistic MentalityThe Anti-Capitalistic MentalityThe Anti-Capitalistic Mentality is a book written by Austrian School economist and libertarian thinker Ludwig von Mises. It is an investigation into the psychological roots of the anti-capitalistic stance that is widespread in the general populations of the capitalist world...
- The Law
Further reading
- Abu-Lughod, Janet L. Before European Hegemony The World System A.D. 1250-1350. New York: Oxford UP, USA, 1991.
- Josephson, MatthewMatthew JosephsonMatthew Josephson was an American journalist and author of works on nineteenth-century French literature and twentieth-century American economic history.-Biography:...
, The Money Lords; the great finance capitalists, 1925-1950, New York, Weybright and Talley, 1972.